Does the Debt Tax Shield Distort Ownership Efficiency?
The tax laws of most developed countries are debt biased since firms can deduct interest on debt but not on equity. This bias is known to distort investment decisions. However, less is known about how the debt tax shield affects the ownership of assets when bidders differ financial expertise and thus in optimal use of leverage. We show that the debt tax shield need not always distort ownership efficiency. Assets end up with the socially preferred owner when differences in financial and productive expertise between bidders are small and better financial expertise reduces expected bankruptcy costs.
|Date of creation:||11 Jun 2010|
|Date of revision:||22 Sep 2017|
|Publication status:||Forthcoming as Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg, 'Does the Debt Tax Shield Distort Ownership Efficiency?' in International Review of Economics and Finance, 2017.|
|Contact details of provider:|| Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden|
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Fax: +46 8 665 4599
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